Investor Relations

Exposure to credit risk, inherent in the possibility of default by a counterparty or in the deterioration of its creditworthiness, is managed by means of appropriate analyses and evaluations of individual counterparties, with each of these being assigned an internal credit rating (internal-ratings-based approach). The assignment of the rating category provides an estimate of the probability of default by a particular counterparty. A degree of reliability is indicated for each level, which is carefully monitored and must never be exceeded. The selection of counterparties for both the industrial and financial transactions depends on their high credit ratings.
The risk of concentration, in terms of both customers and segments, is also monitored continuously; however, ‘alert’ situations have never occurred.

The following table provides information on the ERG Group’s exposure to credit risk at year end, by a classification of assets according to the corresponding creditworthiness reflecting the internal ratings assigned.

Liquidity risk is the risk that financial resources may be insufficient to cover all obligations falling due. The ERG Group currently ensures adequate coverage of its financial requirements with the generation of cash flows and the availability of credit lines provided by various counterparties.

The following tables summarise the maturity profile of the Group’s financial liabilities as of 31 December 2010 and as of 31 December 2009, based on undiscounted contractual payments.

Market risk includes currency exchange rate risk, interest rate risk and commodities price risk. Management of these risks is regulated by the guidelines indicated in the group’s Risk Management Policy and internal procedures of the operational finance department.
Furthermore, specific risk management policies and procedures, based on industry best practices, were developed for the Power & Gas business to continue to measure exposure to risk in terms of a risk capital value allocated by the Parent Company.

Currency exchange rate risk
Exchange rate risk is the in exchange rates expressed in the various currencies relative to the Euro, which impacts the company's performance. Net flows generated by the company, in currencies other than the Euro (reference currency) constitute exposure to exchange rate risk. In order to mitigate the volatility of these exposures, open positions are hedged on both the spot and forwards markets.
The following table shows the impact on pre-tax profit with all other variables kept constant of the adjustment to the fair value of financial assets and liabilities resulting from a change of +/- 10% in the exchange rate towards the dollar.

Interest rate risk
The interest rate risk identifies the variation in future interest rates that could determine higher costs for the Group. Interest rate risk is hedged by using derivative contracts, such as interest rate swaps and interest rate options (plain vanilla).
The following table illustrates the impact on pre-tax profit (due to adjustments to the fair value of financial assets and liabilities), and on shareholders' equity (due to adjustments to the fair value of the derivative instruments comprising the cash flow hedge reserve) of a +/-1% change in interest rate, while holding all other variables constant.

Impact on income statement

Impact on shareholders' equity

Commodity Risk
Commodity price risk consists in unexpected changes in the prices of raw materials and of services, as well as of finished products and services provided for sale on the open market.
The current policy for oil commodities price risk management envisages the use of instruments and methods that can achieve the annual average annual prices reported in Platt’s quotations for raw materials and finished products. The objective defined in the Risk Management Policy is to target the annual average refining margin according to the existing industrial organisation.
In order to realise the annual average refining margin, the Group uses derivative instruments such as commodities swaps and commodities options with underlying crude oil and petroleum products.

The following table considers the derivative financial instruments tied to different categories of commodities, oil and energy, and shows in case of reasonable changes in prices – with all other variables kept constant – the impact on variations in-pre-tax profit (due to adjustments to the fair value of financial assets and liabilities) and Group shareholders’ equity (due to adjustments to the fair value of the derivative instruments comprising the cash flow hedge reserve) of a +/- 25% change in the price of commodities.
 
Impact on income statement

Impact on shareholders'equity

The stock price risk in 2009 is represented by short-term investments of excess liquidity in mutual funds and SICAVs.
As of 31 December 2010 the existing risk and related shocks were immaterial.